The latest in the ForexLive preview series looks at the ECB decision today
We've seen a fair amount of euro selling as we wait on the ECB and the words of Mr D but I've been thinking that perhaps all the hype and fear on drastic action is a little overdone.
Better data recently including French and German industrial production in the past two days has been encouraging to say the least and there's definitely been other bright spots since the ECB's last meeting.
Granted low inflation/deflation is still a concern but firmer oil prices filtering through will most certainly help. I'm no economist, and have never pretended to be, but it seems clear to me that cheaper money/neg rates/QE are having limited impact apart from helping banks shore up their defences so what advantage is to be gained from carrying on down that path?
The SNB have said recently that there's a finite limit to neg rates and the ECB might do well to take heed of Jordan's words:
"By introducing unconventional monetary policy measures, central banks have regained a certain room for manoeuvre. However, these unconventional measures cannot be deployed endlessly to achieve desirable monetary conditions.Interest rates, for example, cannot continue to be lowered into negative territory without at some point precipitating a flight to cash. Foreign exchange market interventions and quantitative easing programmes carry with them the increasing risk that a central bank's ability to conduct monetary policy may be compromised in the long term.
Furthermore, our practical experience of calibrating unconventional measures and of gauging their effects is still limited compared to that of the conventional interest rate instrument. In light of these reservations, unconventional measures must be used with caution, and their long-term consequences taken into consideration. They must also be continuously reassessed."
It is assumed ( always a dangerous thing) by some/many that Draghi wants the euro lower and that will be the main focus of today's action and rhetoric. There's little doubt that weaker currency does help inflation, something which BOE gov Carney is also grateful for right now, but is that enough to want drive the euro lower, or more importantly be able to?
I have long highlighted that there is natural demand for the euro from China and elsewhere and now that it's achieved the status of a funding-currency for equities and other asset classes that's another bump in the road that Draghi has to overcome or accept. Ok, the correlation isn't always there but often enough to consider it in play.
Will Draghi have us rocking or rolling later?
My 2016 forecast for EURGBP was an eventual test of 0.8000 from around 0.7400 when I wrote it and that's happened already much to my own surprise (the speed if not the accuracy) so here at 0.7720 I'm re-assessing again but in the current scenario I'm still inclined to buy dips.
I've pointed out that EURJPY has had a double whammy of late with ECB-anticipated euro weakness combined with year-end yen repatriation but that latter effect will be gone next month. Ok, the BOJ are boring us senseless re the chances of further easing and I think their tool box is limited but it's said that desperate men do desperate things, and there's no two more desperate sounding figures out there right now than Abe and Kuroda.
EURUSD has a huge option expiry interest today between 1.0700 and 1.1100 and that will help to contain the post-ECB fallout.
So I'm going for a not-so-dovish Draghi to remain concerned about inflation,try and talk down the euro but highlight the bright spots and go for minimal adjustment to deposit rate and QE at this time. The absence of hawk and BUBA boss Weidmann from the voting gang that has been mooted around this morning is largely irrelevant as Ryan has just posted
Of course all of this is totally hypothetical and just my own view but I do feel that the euro can rally again sooner rather than later. My real advice for today though is, as always, wait for the facts and make the most of the ride.
You know it makes sense.
